Consumers have long complained about credit card policies that usually result in extra fees. Now, federal regulators are beginning to listen.
The U.S. Office of Thrift supervision has endorsed a plan that would limit many of these "unfair and deceptive" billing practices that consumers are complaining about. The changes are significant.
They would make it much harder for a credit card company to increase a card holder's percentage rate on an outstanding balance. It would also ban "double-cycle billing," the practice of calculating interest charges from the start of the previous billing cycle.
For debit card holders, there's relief from overdraft fees. Under the proposed rule, consumers could opt out of a thrift's "overdraft protection" program. Under current rules, banks allow debit card transactions to go through when a customer has overdrawn their account, but tacks on a hefty fee. Many consumers have said it would be better if the sale were denied than to have to pay an overdraft fee.
While the rules would apply only to thrift institutions, it's widely believed that the federal agencies that regulate banks and credit unions will adopt the same rules. The Federal Reserve, which regulates banks, and the National Credit Union Administration, which oversees federal credit unions, are expected to join the OTS in finalizing the rule changes by the end of this year.
Specifically, the proposal makes the following changes:
For Credit Cards:
1. Reasonable Time to Make Payments Institutions would be prohibited from treating a payment as late unless consumers have been provided with a reasonable amount of time to make payment. The proposed rule would create a safe harbor for institutions that adopt reasonable procedures to ensure that periodic statements are mailed or delivered at least 21 days before the payment due date.
2. Payment Allocation When different annual percentage rates apply to different balances, institutions would be prohibited from allocating any amounts paid in excess of the minimum payment in a manner that is less beneficial to consumers than one of three methods. For example, institutions could apply the entire amount first to the balance with the highest annual percentage rate or split the amount equally among the balances. When an account has a discounted promotional rate balance or a balance on which interest is deferred, institutions would be required to use payment allocation practices that give consumers the full benefit of the discounted rate or deferred interest plan.
3. Interest Rate Increases on Outstanding Balances Institutions would be prohibited from increasing the annual percentage rate on an outstanding balance unless certain exceptions apply. For example, an institution could increase the variable rate if a promotional rate has expired or if the cardholder's payment is delinquent (e.g., the minimum payment has not been received within 30 days of the due date).
4. Fees from Credit Holds Institutions would be prohibited from assessing a fee if a consumer exceeds the credit limit on an account solely due to a hold placed on the available credit unless the amount of the transaction would also have exceeded the credit limit.
5. Balance Computation Methods ("Double Cycle Billing") Institutions would be prohibited from computing finance charges on outstanding balances based on balances in billing cycles preceding the most recent billing cycle. The proposed rule would prohibit institutions from reaching back to prior billing cycles when calculating the amount of interest charged in the current cycle, a practice that is sometimes referred to as two- or double-cycle billing.
6. Fees/Deposits Charged to the Account for the Issuance of Credit Institutions would be prohibited from charging to the credit card account fees or security deposits for the issuance or availability of credit (such as account-opening fees or membership fees) if those fees or deposits utilize the majority of the available credit on the account.
In addition, the proposal would require that fees or deposits that exceed 25% of the credit limit be spread over the first year, rather than charged as a lump sum at account opening. Institutions would not be prohibited from issuing credit cards that require a consumer to pay a security deposit if that deposit is not charged to the account. Such an approach can be a means of repairing or building credit.
7. Firm Offers of Credit Institutions making firm offers of credit that advertise multiple annual percentage rates or credit limit ranges would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest annual percentage rate and highest credit limit advertised.
For Overdraft Programs:
1. Opt Out Institutions would be prohibited from assessing a fee for paying an overdraft unless they provide a consumer with: the right to opt out of payment of overdrafts; a reasonable opportunity to exercise the opt-out; and the consumer does not opt out. The proposed opt-out right would apply to all transactions that overdraw an account regardless of the whether the transaction is, for example, a check, an automated clearinghouse (ACH) transaction, an ATM withdrawal, a recurring payment, or a debit card purchase at a point of sale.
2. Fees from Debit Holds Institutions would be prohibited from assessing an overdraft fee if the overdraft is caused solely by a hold on funds that exceeds the actual purchase amount of the transaction, unless this purchase amount would have also caused the overdraft.
Many of the proposed rules are similar to measures contained in the "Credit Cardholders' Bill of Rights," being sponsored in Congress by Rep. Carolyn Maloney (D-NY).
"The playing field between card companies and cardholders has become very one-sided in recent years. Yet, more and more Americans are turning to their credit cards to help pay bills, buy groceries, and make ends meet in this troubled economy," said Maloney, who serves as chairwoman of the Subcommitee on Financial Institutions and Consumer Credit.
"Instead of looking the other way while Americans fall deeper into debt, Congress can and should take swift action to reform major credit card industry abuses and improve consumer protections for cardholders," she said.
The committee last month heard testimony from both representatives of the financial services industry and citizens sharing their stories of credit card problems, as well as Sen. Carl Levin (D-MI), who has held several hearings on credit card lending and billing practices and pushed similar legislation in the Senate.
"Credit card issuers like to say that they are engaged in a risky business, lending unsecured debt to millions of consumers, but it is clear that they have learned to price credit card products in ways that produce enormous profit," Levin said.
"Credit card issuers make such a hefty profit that they sent out 5 billion pieces of mail last year soliciting people to sign up. With profits like those, credit card issuers can afford to give up abusive practices that treat consumers unfairly."
Moving the goalposts
Among the provisions in Maloney's bill would be the prohibition of interest rate hikes for credit card holders in good standing -- those who pay their bills on time and do not incur late fees.
Such was the case for Steven Autrey of Fredericksburg, VA, who testified that in 2007, his Capital One Visa card's interest rate skyrocketed from 9.9 percent to 15.9 percent, with no explanation and despite only one late charge in his payment history -- a complaint shared by many other Capital One cardholders.
Autrey contacted Capitol One, who told him that changes in the financial environment would necessitate the rate hike, even for accounts in good standing like his. He testified that the lender would let him keep his current interest rate, but only if he closed his account, a move which could harm his FICO credit score and make new purchases more difficult.
"The NFL does not allow one team, in the midst of the fourth quarter, to unilaterally move their end zone 20 yards just because they don't like the point spread. The rules are laid out before the kickoff, and the umpires enforce the same rules for both home and visiting teams for the whole contest," Autrey said. "It's time for legislation at the federal level that tells the credit card industry, 'Game Over' to unilateral, one-sided, contract changes."
Regulatory baby steps
John Carey, chief operating officer for Citigroup's CitiCards division, agreed that the industry had not done enough to minimize penalties as a result of lending unsecured credit. Carey referenced Citigroup's decisions to abandon "universal default" rate hikes, where the lender raised interest rates if the borrower was late paying other bills, and "any time any reason" rate hikes.
"We hoped and expected that these points of differentiation would lead customers to vote with their feet...[but] we have been disappointed with the results we have seen so far," Carey said. "The problem is that customers cannot recognize the difference between us and our competitors."
Carey advocated adoption of the Federal Reserve's proposed changes to credit card disclosure agreements, which simplify the language and terms and extend the time between an announced rate hike and its implementation from 15 days to 45.
But consumer advocates at the hearing testified that even better disclosure agreements did not go far enough in remedying the role credit cards play in America's multibillion-dollar consumer debt.
Consumer Federation of America's Travis Plunkett said that delinquencies in credit card payments were steadily increasing due to high gas prices, the erosion of home equity as a payment method, and other increased utility costs, and that credit card companies continued to reap strong profits even in the face of general economic loss.
"Borrowers who pay off their balances in full and on time each month do not earn as much profit for the industry," Plunkett said. "With revolving debt nearly quadrupling since 1990, credit card companies' profitability should remain strong."